Performance Standards and Managers’ Adoption of Risky Projects

Abstract

Innovation is the key to competitive advantage, and attaining innovation often requires taking on higher-than-usual levels of risk. Yet, while managers commonly profess support for efforts in innovation, they often emphasize safe, short-term results over more risky, long-term outcomes. As a result, a major challenge to firms is increasing employees’ willingness to adopt risky yet more profitable alternatives.

This study uses an experiment to test how the level of performance standard, per se, affect employees’ propensity to take on (more) risky projects. Using participants from the U.S. and Taiwan to represent higher versus lower individualism national cultures, it also examines the effects of national culture on employee actions. The findings are consistent with expectations from combining goal and prospect theories that a specific high standard motivates greater risk taking than a low standard. We find only limited difference between the U.S. and Taiwanese samples’ individualism/collectivism scores, which may help to explain the lack of significant differences between their reactions to the performance standard treatment.

Citation

Chow, C.W., Kohlmeyer, J.M. and Wu, A. (2007), "Performance Standards and Managers’ Adoption of Risky Projects", Lee, J.Y. and Epstein, M.J. (Ed.) Advances in Management Accounting (Advances in Management Accounting, Vol. 16), Emerald Group Publishing Limited, Leeds, pp. 63-105. https://doi.org/10.1016/S1474-7871(07)16002-0